The Federal Reserve kept interest rates unchanged on Wednesday and said it would start winding down its massive holdings of bonds in October.
In a move largely expected by financial markets, the policymaking Federal Open Market Committee (FOMC) agreed to keep its benchmark rate target at 1%-1.25%, forecasting at least one more hike this year.
The accompanying statement also revealed the Fed’s plan to reduce its $4.5 trillion balance sheet it built up in the wake of financial crisis. The central bank expects to begin normalization of its balance sheet in October, sticking with the plan detailed in June.
In a sign of confidence in the U.S. economy, members of the rate-setting committee revised upwards their projections for economic growth this year and stuck with the previous rate-hike outlook released in June.
They forecast U.S. economic growth of 2.4% in 2017, a 0.2% increase from the previous projection of 2.2% in June. The trend of slowing inflation, however, forced the central bank to scale back its inflation expectation to 1.5% for 2017, down 0.2% from the 1.7% forecast in June.
The “dot plot,” part of the FOMC’s Summary of Economic Projections, indicated that the central bank saw rates rising to between 1.25% and 1.5% by the end of the 2017. With rates steady at 1-1.25%, that points to one further rate hike this year. The majority of traders – more than 70% – expect the rate hike in December, according to Investing.com’s fed rate monitor tool.
The statement also highlighted that the impact on the economy of Hurricanes Harvey, Irma and Maria are “unlikely” to alter the course of the economy over the medium term.
“Storm-related disruptions and rebuilding will affect economic activity in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term,” the statement said.
The mostly unchanged view on a year-end rate hike saw US treasury yields move sharply higher, lifting the dollar to session highs while gold came under pressure.
The dollar rose 0.22% to trade at 91.81 while the U.S. 10-Year rose sharply to 2.264.